VC 2.0: The Lean Investor (Sept 2010)

The Lean VC: a Silicon Valley 2.0 Story Dave McClure, 500 Startups ( @DaveMcClure ) http://500startups.com Capital Factory Demo Day – September 2010 – Austin, TX Re-Inventing Venture Capital & Angel Investing through Innovation, Incubation, & Iteration

Changes, Oh.
Venture Capital 2.0 = Fewer, Smaller Funds (<$100M)
Death of Large Funds
Birth of Super Angel Funds
M&A Market Changes
Platforms = Distribution + Monetization (not Tech)
Search (Google)
Social (Facebook, Twitter)
Mobile (Apple, Android)
Incubators & Metrics = Many Small Experiments (most FAIL )
Y-Combinator, TechStars, SeedCamp
Betaworks, fbFund REV, Nitobi
500 Startups

[Pardon The Blatant Commercial]

Dave McClure
2001-2010:
Startup Investor: 500 Hats LLC, Founders Fund
Tech Marketing : PayPal, Simply Hired, Mint
Advisor, Angel Investor : 70+ Startups
Conf. Organizer : Web 2.0, O’Reilly, Startonomics
Stanford Visiting Lecturer : Facebook, Startup Metrics
80’s & 90’s:
Entrepreneur : Founder/CEO Aslan Computing (acq.)
Developer : Windows Apps / SQL DB Admin
User Groups : E-Commerce, Internet, Client-Server
Engineer : Johns Hopkins ‘88, BS Eng / Applied Math
GEEK, CODER, ENTREPRENEUR Blogger, Startup Advisor Internet Marketing, SuperAngel/Micro-VC

500 Hats Investments (13 deals, 2004-2008, ~$300K) 2004-2008: 13 deals, avg $25K results: 1 exit @ $170M (9x ), +3-7 future wins (i hope)

Founders Fund Investments (43 deals, 2008-2010, ~$2.9M) Results : 8 Seed rounds @ $500K+, 3 small exits, 5 ramen-profitable) Results : 1 small exit @ 4x, 5 Series A $2M+, (expect 5+ more) fbFund REV (Facebook Incubator) 22 deals ($850K) ~$15-75K FF Angel LLC 21 deals ($2M) ~$50-250K

500 Startups Investments (~40+ deals, 2010, ~$3.5M) 2010 YTD: 38+ deals, avg $100K Wildfire Crave Tello AwayFind MyGengo Recurly Mogotix EcoMom Zencoder Crocodoc SayHired RevNetics AppBistro Foodspotting Medialets Rapportive TransFS SiteJabber Estately FlowTown OneForty Twilio Postling Plancast WePay OtherInbox Viikii Zozi Graphicly Networked Blogs What Up Texas! Hi Josh 

500 Startups LP Mountain View, CA – Founded 2010
Seed Fund & Incubator Program
Design , Distribution , Data ( AARRR! )
40+ Portfolio Companies ($50K-250K)
Twilio
Wildfire
Sendgrid
MyGengo
Erply
Payvment
Zozi
OtherInbox

Venture Capital 1.0 = Too Big To FAIL WIN ? (at least for *Internet* Startups) Venture Capitalist? Super Angel.

Silicon Valley Investor Ecosystem True Ventures First Round Capital Benchmark Sequoia Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) “ Small” VC Funds ($50-250M) “ Large” VC Funds (>$250M) Y-Combinator TechStars SoftTech (Clavier) FloodGate (Maples) Felicis (Senkut) SV Angel (Conway)

Venture Capital: Still Relevant?
Good 4 big CAPex:
Hardware
Enterprise SW
Clean Tech
BioScience
Facebook, Zynga ,
Groupon
Not So Great 4:
Most Consumer / SMB Internet Startups
Consulting Shops
Lifestyle Biz
Porn, Gambling

More & Smaller Acquisitions
Mature Internet Platform Co’s:
GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook
Lots of Users, $$$
Outsourcing Innovation
Lots of M&A (but small)
Great for Angels & Entrepreneurs
Not so Great for (big) VCs

Platforms 2.0 Search, Social, Mobile

Web 2.0 : Good Times, G .
# Users, Bandwidth = Bigger .
Startup Costs = Lower .
Transaction$$$ = Better .
Building Product => Cheaper, Faster, Measurable
Getting Customers => Easier, More Predictable
Product & Market Decisions based on
Measured User Behavior
R.I.P. *BAD* TIMES

Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana

Distribution Platforms
Customer Reach: 100M+
Search : Google (SEO/SEM)
Social : Facebook , Twitter, Zynga, LinkedIn
Mobile : Apple (iPhone, iPad), Android, Blackberry
Media : YouTube /Video, Blogs, Photos
Email/IM : Gmail , Yahoo, Microsoft

Web 2.0 Business Model: KISS 
1) Re-invent Web 1.0 Businesses
Make a Website, a Widget, an App
Sell Stuff to People (Transactions, Subscriptions)
2) add Web 2.0 Tech nology
Search , Social , Mobile
Google , Facebook , Apple
Email, ECommerce
3) Get Customers , Make Money G
Distribution, Distribution, Distribution

Startup Incubators Lots of Hot, Cool, Web 2.0! (+ lots of FAIL .)

Incubator 2.0: Fast, Cheap, FAIL
Incubators growing in popularity, acceptance
Supportive ecosystem for startups (angels, VCs)
Efficient use of investment capital ($0-100K)
High fail rate (60-80%) => large initial sample size

Incubator 2.0: Education, Collaboration, Iteration
Focus on education & shared resources
Success based:
many small startup experiments
common platforms, problems & solutions
physical proximity, open/collaborative environment
fast fail, iteration, metrics & feedback
Incremental investment; high-risk, but high-reward

fbFund REV
fbFund REV : Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform & Facebook Connect.
22 startups @ ~$35K each ($850K total)
3 month program: Technology, Design, Marketing, Business topics
Success: ~ 8 startups funded >$500K – Wildfire Interactive raised $4M

Startup Metrics: Lean Startup & Lean VC Measure Stuff, Iterate. (Rinse & Repeat.)

“ Just Gimme the GOOD Leads” Users, Pages, Clicks, Emails, $$$...?
Q: Which of these is best? How do you know?
1,000,000 one-time, unregistered unique visitors
500,000 visitors who view 2+ pages / stay 10+ sec
200,000 visitors who clicked on a link or button
20,000 registered users w/ email address
2,000 passionate fans who refer 5+ users / mo.
1,000 monthly subscribers @ $5/mo
the good stuff.

Lean Startup Challenges
Startups have problems in 3 main areas:
Management : Set Priorities, Define Key Metrics, Make Decisions .
Product : Build the “Right” Features. Measure, Iterate .
Marketing : Distribution, Distribution, Distribution .

Role: Founder/CEO
Q: Which Metrics? Why?
A: Focus on Critical Few Actionable Metrics
(if you don’t use the metric to make a decision, it’s not actionable)
Hypothesize Customer Lifecycle
Target ~3-5 Conversion Events (tip: Less = More)
Test, Measure, Iterate to Improve

Role: Product / Engineering
Q: What Features to Build? Why? When are you “Done”?
A: Easy-to-Find , Fun / Useful , Unique features that
Increase Conversion (stop iterating when increase decelerates)
Wireframes = Conversion Steps
Measure, A/B Test, Iterate FAST (daily/weekly)
Optimize for Conversion Improvement
80% on existing feature optimization
20% on new feature development

Role: Marketing / Sales
Q: What channels? Which users? Why?
A: High Volume (#), Low Cost ($), High Conv (%)
Design & Test Multiple Marketing Channels + Campaigns
Select & Focus on Best-Performing Channels & Themes
Optimize for conversion to target CTAs, not just site/landing page
Match/Drive channel cost to/below revenue potential
Low-Hanging Fruit:
Blogs
SEO/SEM
Landing Pages
Automated Emails

“ Lean Investor” Model
Method : Invest in many startups using incremental investment, iterative development. Start with lots of small experiments, filter out failure, and expand investment upon success… ( Rinse & Repeat) .
Incubator : $0-100K (“ Build & Validate Product ”)
Seed : $100K-$1M (“ Test & Grow Market ing Channels” ”)
Venture : $1M-$10M (“ Maximize Growth & Revenue ”)

Investment #1: Incubate (“Product”)
Structure
1-3 founders
$25K-$100K investment
Incubator environment: multiple peers, mentors/advisors
Build Functional Prototype / “ Minimum Viable Product ” ( MVP ):
Prototype->Alpha, ~3-6 months
Develop Minimal Critical Feature Set => Get to “ It Works ”
Instrument Basic Dashboard, Conversion Metrics
Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10)
Demonstrate Concept, Reduce Product Risk, Test Functional Use
Develop Metrics & Filter for Possible Future Investment

Investment #2: Seed (“Market”)
Structure
2-5 person team
$100K-$1M investment
Syndicate of Angel Investors / Small VC Funds
Improve Product, Expand Market , Test Revenue:
Alpha->Beta, ~6-12 months
Customer Sat ≥ 6 => Get to “ Doesn’t Suck ”
Setup A/B Testing Framework, Optimize Conversion
Test Marketing Campaigns, Cust Acqstn Channels
Prove Solution/Benefit, Assess Market Size
Test Channel Cost, Revenue Opportunity
Determine Org Structure, Key Hires

Investment #3: Venture (“Revenue”)
Structure
5-10 person team
$1M-$5M investment
VC Investors
Make Money , Get to Sustainability:
Beta->Production, 12-18 months
Customer Sat ≥ 8 => “ It Rocks, I’ll Tell My Friends ”
MktgPlan => Predictable Channels / Campaigns + Budget
Scalability & Infrastructure, Customer Service & Operations
Connect with Distribution Partners
Prove/Expand Market, Operationalize Business
Future Milestones: Profitable/Sustainable, Exit Options

Summary
Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) + More, Smaller Exits (<$100M)
Platforms 2.0 = Distribution + Monetization, not Tech
Incubators, Metrics = Many small Experiments (most FAIL ).
Measure Stuff.
Iterate, Iterate, Iterate.

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VC 2.0: The Lean Investor (Sept 2010)

by Dave McClure on Sep 08, 2010

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VC 2.0: The Lean Investor (Sept 2010) — Presentation Transcript